Exclusive Q&A On Banking & Finance With Simon Jaffa
Posted: 27th May 2015 09:351) Have there been any recent regulatory changes or interesting developments in your jurisdiction?
The enactment of the Encouragement of Competition and Reduction of Concentration Law, 2013 (the "Concentration Law") at the end of 2013 is expected to play a significant role in the development of the financing market in Israel in the next few years. The Concentration Law places limitations on entities deemed Significant Financial Entities in relation to their interests in deemed Significant Real Entities. In addition, the Concentration Law limits the ability of a single entity to hold the means of control in both Significant Real and Financial Entities. There are also corporate governance requirements with respect to office holders in Significant Financial Entities and their interests in other Significant Financial Entities or Significant Real Entities. Major Israeli financial entities – banks, insurance companies, provident funds etc. are deemed as Significant Financial Entities.
Accordingly, we are already identifying changes in the willingness of these institutions to provide financing to various entities and changes to the securities required for financing. Entities deemed Significant Financing Entities are less willing to become shareholders in an event of default, due the requirements of the Concentration Law.
Further, pursuant to the Law, the Bank of Israel is expected to promulgate additional limitations as to the ability of a financial entity to offer credit to a group of companies under common control. The banks have already started limiting their exposure to certain sectors and as these additional limitations come into force, it will leave the playing field open for new players, including international entities, to offer financing to existing business groups.
2) With record numbers of Americans renouncing citizenship, can you talk us through the complex issues presented by FATCA and double taxation treaties?
Israel has accepted its own FATCA agreement with the Unites States (since Israel is a jurisdiction where there are many US citizens who have taken up residency). Banking guidelines have been adjusted for Israel’s commitments to the FATCA and other international agreements. There has also been a significant increase in transparency in Israel similar to that of other western countries. This has included a growing commitment by the legal and accounting profession to enhanced transparency consistent with global trends.
3) What key trends do you expect to see over the coming year?
There is an on-going discussion regarding the degree of centralization in the banking market in Israel and specifically the credit card sector, which includes only three players, all of which are controlled by banks. The Israel Antitrust Authority has rendered a number of decisions aimed at increasing competition in this market and reducing consumer prices. Such steps include mandatory introduction of debit cards, the use of which is highly limited in Israel at this time. Further, there is discussion of requiring the banks to sell their interests in the credit companies.
In addition, we expect that the new government will push for the establishment of an internet bank and the initiative to open a co-operative bank, which failed up to now, may receive some regulatory easements.
4) Can you detail the role of credit rating agencies in structured finance markets?
The reports provided by credit rating agencies are relied on in every financing and banking transaction or transactions involving financing. Further, these reports are highly relied upon by the players in the stock market. In light of the central role credit rating agencies play in the structured finance markets, recently, law and regulation came into effect requiring these agencies to obtain a license and meet certain criteria with respect to financial stability, insurance and control. The purpose of the regulation is to ensure the independence, lack of any potential conflicts of interests and accountability of the agencies.
In parallel, there is an attempt to strengthen the consumer credit agencies in order to facilitate the creation of a more sophisticated consumer credit market. This market is predominantly controlled by the banks, as each of the banks is better placed to assess the credit risk associated with consumers who manage their finance at that bank and, as a result, the offers made by third parties tend to be less competitive.
5) What difficulties arise as a result of cross-border activity?
Israel has a complex regulatory system, not always compatible with regulatory requirements in the EU or the US. This often leads to a significant difference between the financial packages between what a foreign investor may be expecting and those actually offered by local institutions. We generally can assess when there’s still room to improve a financing deal as well as being able to identify when the proposal is probably as good as it gets!
Another challenge is the inability of foreign investors to adapt to local practices.
Therefore, in every cross-border transaction, it is important to have local Israeli counsel involved from the early stages of structuring the transaction. This will avoid potential regulatory difficulties and prepare in advance for every potential regulatory requirement.
6) Can you outline the available alternative capital raising options in your jurisdiction?
From a business perspective in recent years we notice institutional entities entering more aggressively as financiers into various business transactions and not only through public or limited IPO's. We believe that the regulatory changes related to the Concentration Law, as well as limitations placed by the Bank of Israel on the bank's ability to offer credit, will strengthen this trend and we will continue to see new players in the financing market as well as new financing structures.
In addition we believe that crowd-funding will continue to develop and web-based models for raising initial capital either loan based or equity based will develop during the up-coming year. The relevant authorities and specifically, the Israel Securities Authority are working on regulation, following the developments in the US and the UK to regulate and enable the use of financing portals for certain types of start-ups and small and medium businesses.
Simon Jaffa, a founding partner of Barnea & Co., heads the Infrastructure and Project Finance Department. Simon has over 15 years in project finance, during which he has advised a wide range of leading infrastructure companies. Over the course of his career, he has led cross-border transactions and accrued extensive experience in representation of clients in their dealings with Israeli authorities.
Simon's experience extends across all major areas of infrastructure, including transportation, electricity, water, solar energy and gas.
Simon is also a corporate finance and M&A expert with significant international experience including running multi-jurisdictional cross border transactions.
Prior to moving to Israel Simon worked in London for a number of years where he gained experience in UK corporate acquisitions and disposals and venture capital related transactions.
Simon can be contacted on +972 9 9600700 or by email at firstname.lastname@example.org